San Diego restaurants can legally add a surcharge to diners' bills for labor costs, court rules

San Diego restaurateurs, including the Cohn Restaurant Group and George's at the Cove, prevail in lawsuits claiming that the surcharges they added to diners' bills to cover rising labor costs were illegal.

San Diego restaurateurs, including the Cohn Restaurant Group and George's at the Cove, prevail in lawsuits claiming that the surcharges they added to diners' bills to cover rising labor costs were illegal.

Nearly a dozen San Diego restaurants that were sued over an extra charge they had added to diners’ bills were within their legal right to do so, a Superior Court judge has ruled.

At issue were surcharges of 3 percent to 4 percent of the cost of a meal that local restaurants have been increasingly using to help defray the rising cost of labor, stemming largely from a succession of increases in the minimum wage, now at $12 an hour.

Multiple lawsuits targeting some of San Diego’s highest profile restaurant operators, including George’s at the Cove and the Cohn Restaurant Group, claimed they were defrauding their patrons by tacking on illegal surcharges in violation of multiple statutes of the state business code, among them false advertising and unfair competition. The legal challenges also cited violations of the California Consumer Legal Remedies Act.

Superior Court Judge Timothy Taylor disagreed, stating in a ruling last November that the “undisputed evidence establishes that the surcharge is not unlawful as matter of law.” Further, he concluded that the defendant — in this case Galaxy Taco in La Jolla — “made adequate and non-misleading disclosures about the surcharge and that plaintiff did not rely on a misleading statement in the surcharge disclosure.”

That ruling in turn led to a series of additional rulings in December and this month that were all in favor of nine more restaurants. The last of the judge’s orders came this week and were related to suits involving six of the restaurateurs, including George’s at the Cove, Karl Strauss Brewing Company, and operators of Kettner Exchange.

Four other cases involving additional restaurants were dismissed for various reasons. In the case of El Torito, for example, its operator had filed for bankruptcy last year.

Attorney Bruno Katz, whose firm represented several of the restaurants, says he believes the collection of Superior Court rulings should bring an end to the debate of over whether restaurant surcharges are legal.

“There have been no rulings in the state of California where the surcharges are illegal,” Katz said. “In fact, they’ve been utilized in California for many years in many different industries, as well as in the state of California and many municipalities.

“We believe that the court got it right and this should end it.”

The consumer rights law firm that challenged the surcharges is not so sure.

While the specific lawsuits that have already been decided are dead, it doesn’t mean new litigation couldn’t be filed in state court, said attorney Robert Hyde of Hyde & Swigart. He also pointed out that he still has a case pending in federal court involving restaurants in a Hilton hotel restaurant on East Mission Bay Drive that already has been certified as a class-action case.

“The Superior Court ruling has zero impact because it isn’t precedent setting,” said Hyde, whose firm filed the cases on behalf of various clients who dined at the restaurants. “We could still file cases against these same defendants as long as we have a different plaintiff, as well as any new defendants we become aware of. All this does is put an end to those specific cases.”

While Hyde’s firm could appeal the Galaxy taco case, Hyde did not indicate whether he planned to do at this time.

Katz says he is doubtful that Hyde would prevail in his federal court case given that state law is being challenged.

“As to what Mr. Hyde elects to do, that is his decision to make,” Katz said, “but we feel strongly that the California state law that the court interpreted in the state case applies equally and will result in the same decision in federal court when applying the state law.”

Hyde’s firm appears to still be seeking clients for future cases. Visitors to the firm’s website are told that “Thousands of San Diego residents may receive cash settlements from restaurants because of 3 — 4% surcharges added to their bills….but, sadly, most of them are simply unaware of their rights.”

Said Hyde, “I think what the restaurants are saying to California consumers with these surcharges is, keep voting for those minimum wage laws and you will have to keep paying these surcharges.”

Representatives of most of the restaurants involved declined to be interviewed, but Sami Ladeki, who owns Sammy’s Woodfired Pizza and prevailed in the court case, emailed a statement saying, “We’re very pleased with the court’s ruling in our favor. This reinforces our belief that the lawsuit was frivolous, and that the surcharge is both legal and fair.”

While San Diego City Attorney Mara Elliott’s office has never weighed in on the legality of the restaurant surcharges, in 2017 she did go after restaurants that did not “clearly and conspicuously” forewarn diners that they were being charged an extra levy.

At the time that the lawsuits were filed in 2017, Elliott’s office said they would be monitoring the litigation and hoped they would “lead to greater consumer protection.”

In his ruling in the Galaxy Taco case, the judge pointed out the efforts made by the restaurant to clearly notify patrons that they would be seeing a surcharge on their bills.

“When the plaintiff went to Galaxy Taco, he entered through the front entrance, walked up and past the framed surcharge notice on the host stand, and ordered from a menu that had a surcharge notice in blue color right next to the two a la carte tacos that he ordered,” Taylor wrote. “In addition, the defendant has stated a valid business reason to add a surcharge rather than simply raising the price.”

Jot Condie, president of the California Restaurant Association, said the latest court rulings reinforced his belief that the San Diego litigation represented the “worst kind of shakedown lawsuits.” He acknowledges, though, that restaurants could potentially face more legal challenges.

He added, “Consumers throughout California have been accepting of surcharges in general, whether it’s in transportation, the hotel space or restaurant space. I do think this is an adjustment for consumers and restaurant owners. And it’s become fairly common in our industry on the West Coast where wages are going up at a record rate.”

In Los Angeles and San Francisco, a number of restaurants have long added surcharges to bills, although they were used to help cover health care costs. A few years ago, restaurateurs in Los Angeles were sued because of the special levies, but the rationale was different. The L.A. suite alleged the restaurant owners had conspired to violate price-fixing and collusion laws.

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